A simple moving average timing model using stocks and treasuries

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CULater
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A simple moving average timing model using stocks and treasuries

Post by CULater » Wed Oct 03, 2018 11:54 am

I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: A simple moving average timing model using stocks and treasuries

Post by bloom2708 » Wed Oct 03, 2018 1:41 pm

Boglehead philosopy:

#5 Never try to time the market.

Fine to throw ideas out. In theory they might work. In practice, just keep on staying the course.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

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Re: A simple moving average timing model using stocks and treasuries

Post by livesoft » Wed Oct 03, 2018 1:43 pm

You go first with real money and your own portfolio.

I like to do market timing, but not with 50% of my portfolio.
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Re: A simple moving average timing model using stocks and treasuries

Post by FIREchief » Wed Oct 03, 2018 2:47 pm

CULater wrote:
Wed Oct 03, 2018 11:54 am
One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
Sell low and buy high?? :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: A simple moving average timing model using stocks and treasuries

Post by nisiprius » Wed Oct 03, 2018 4:35 pm

"Fiddling around" means you are more or less invalidating any value you might get from backtesting. Basically, if you are going to treat backtesting seriously, it has to be done on a chunk of data that is really unfamiliar to you, and you only get one shot at it.

With "fiddling around," I can start with the idea that crashes are governed by the remainder you get after dividing the year by 11. So I backtest 2007 through 2018, and I find that if I go to cash when the remainder is 6, voila! I do much better than if I simply stay in the market.

In reality, this "model" is simply a description of history. It happens that 2008/11 has a remainder of 6. This is really just a way of saying you would have done much better than the stock market if you'd been out of it in 2008.

In most market timing systems, of course, it isn't at all obvious that this is what you're doing, but if you're "fiddling around" trying one idea after another, you probably are.
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Re: A simple moving average timing model using stocks and treasuries

Post by AlohaJoe » Wed Oct 03, 2018 5:06 pm

There are lots of books about it and lots of articles about it. Like this one about how it doesn't work anymore

https://www.barrons.com/articles/a-vene ... 1537963201

Moving averages have been around since at least the 1930s. Have you read any of the voluminous literature about them? If not, I'd start there.

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Re: A simple moving average timing model using stocks and treasuries

Post by Theoretical » Wed Oct 03, 2018 5:52 pm

If you want to do this, listen to systematic traders first. What they describe is VERY different. Fiddling is known as curve-fitting and is a deadly sin for either buy-and-hold or trend or any investment strategy.

Their systems are more about controlling for risk, have a lot of small losses, and tend to be more than one signal and a lot more than just one or two assets.

The other thing about these strategies is that they have very different drawdown structures to the market news, and they can be just as drawn out and brutal as a big equity crash.

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Re: A simple moving average timing model using stocks and treasuries

Post by RonSwanson1776 » Wed Oct 03, 2018 7:42 pm

What kind of reaction were you expecting posting on this forum...

Check out Meb Faber. He's produced a lot of material on the subject: https://papers.ssrn.com/sol3/papers.cfm ... _id=962461

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Re: A simple moving average timing model using stocks and treasuries

Post by delamer » Wed Oct 03, 2018 7:54 pm

There is a whole thread on something similar:

viewtopic.php?f=10&t=259936

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Re: A simple moving average timing model using stocks and treasuries

Post by asset_chaos » Wed Oct 03, 2018 8:00 pm

CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. ... Criticisms? Thoughts?
Where do these schemes fit in the graph below? The red lines approximate boundaries of the feasible set of market timing strategies of US stocks and bonds. The top red line is perfect timing, switching every quarter into what will be the best performing fund of either Vanguard total stock or total bond fund. This can be trivially calculated in hindsight. The bottom red line is perfectly awful timing, switching every quarter into what will be the poorer performing fund of either total stock or total bond fund. The blue line labeled 1 is the actual performance of total stock fund and the blue line labeled 0 is the actual performance of total bond. The blue line in between 0 and 1 is the actual performance of Vanguard balanced index fund. Note the logarithmic vertical axis. While there is a lot of potential extra return between the balanced fund and the best timing scheme, there is also just as much potential extra loss. Where do professional market timers fall on this graph?

Image

Professional market timers, at least the few that have both publicly available data and long-ish track records, don't really do well. In the graph below the axes and the red lines are the same as above, while unfortunately I switched the balanced index fund performance record to a black line. The cloud of grey lines is not important to this discussion. The two yellow lines are publicly available market timing funds (tactical asset allocation funds in the industry jargon). You can invest in either today, and they are the only two funds in Morningstar's list of several hundred tactical asset allocation funds that have a track record that goes back nearly as long as the advent of balanced index fund. In some sense I cherry-picked those two funds, but as Morningstar rates both funds four out of five stars, and they have been in business 23 years, and they have billions of dollars of assets under management, clearly these funds are above average, successful market timing funds. Only, they did not produce above average returns for their investors. They both over their lifetimes trail balanced index.

Image

In fact Morningstar put out an article (Ptak J. In Practice: Tactical Funds Miss Their Chance. Morningstar Advisor; 2012) on the short term returns of all the TAA funds in their database (apparently a lot of TAA funds started around the financial crises---I guess to tout ability to sidestep such market gyrations). The key quote from that article is, “We found that very few tactical funds generated better risk-adjusted returns than Vanguard Balanced Index over the extended time period we studied. Not only has the group of tactical allocation funds underperformed, but not a single one of them outperformed the simple, low-cost, passive fund.”

Market timing, while not disprovable in principle, does not have an expected return above a suitably weighted average of the returns of the assets being timed, and appears empirically to be next to impossible to accomplish in the wild. However, if practiced solely in the area of recreational mathematics, market timing may bring one some amusement.

The graphs are from a recent paper https://doi.org/10.1371/journal.pone.0200561.

By the way, if anyone knows of sources for free data for quarterly returns of market timing funds whose records extend back to the early 90s, please PM me with a link.
Regards, | | Guy

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Re: A simple moving average timing model using stocks and treasuries

Post by hdas » Wed Oct 03, 2018 8:06 pm

asset_chaos wrote:
Wed Oct 03, 2018 8:00 pm
By the way, if anyone knows of sources for free data for quarterly returns of market timing funds whose records extend back to the early 90s, please PM me with a link.
This is a good shop with a decent long term track record. https://ctaperformance.com/wntn. Is not just stocks and bonds tho. I think they trade everything, mostly futures. H

Image
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Re: A simple moving average timing model using stocks and treasuries

Post by nisiprius » Thu Oct 04, 2018 7:32 am

RonSwanson1776 wrote:
Wed Oct 03, 2018 7:42 pm
...Check out Meb Faber. He's produced a lot of material on the subject: https://papers.ssrn.com/sol3/papers.cfm ... _id=962461
He's also produced a real-world example of how well it actually worked, when he tried doing it in public, in real life, using real money, under his personal management. GTAA is both the name of his ETF and the initialism for his "Global Tactical Asset Allocation" strategy. The orange line is GTAA. The blue line isn't just stocks, it's a 40/60 balanced fund, Vanguard Conservative Growth.

Image

The ETF no longer exists so it's hard to find updated charts, and unfortunately I posted some to a defunct free image hosting service (and didn't save the originals), but the history after Faber left the fund was generally similar to what had gone before. The ETF was terminated in about 2017.

Some have said that GMOM, the ETF he launched after quitting GTAA, represents his latest and greatest incarnation of the strategy. I can't speak to that because I haven't followed it. But, for the record, GMOM still hasn't beaten VSCGX, Vanguard Conservative Growth, and obviously has had noticeably more volatility. Note that VSCGX has had a fixed allocation for some time, and that the only thing it has in it to reduce volatility is the presence of 60% in bond index funds... in an era when bonds have not been doing particularly well. And it has international exposure. In fact at the moment it has more international exposure than GMOM (15% cash, 73% US stocks, only 6% international stock, only 1% bonds, and 5% "other," says Morningstar.)

Source
Image
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Re: A simple moving average timing model using stocks and treasuries

Post by dknightd » Thu Oct 04, 2018 8:02 am

CULater wrote:
Wed Oct 03, 2018 11:54 am
Thoughts?
You appear to be concerned about a market downturn. Which we all know will eventually happen. If it concerns you a lot take enough money out of stocks to live on for 5 years. Sequence of returns risk concerns me right now. I'm 1 year away from retirement. I've been slowly moving toward a much more conservative AA. Yes I have lost potential gains, and I'm vulnerable to inflation (I've been moving to short term bonds and MM) but I'm now at an AA that will let me sleep at night if stocks take a 50% hit next year. If that happens, I will just let that money ride, and perhaps add more.
I would never get completely in or out of the stock market. I do let my percentages change based on how I feel. Probably a horrible way to maximize gains. But I'm not concerned with maximizing gains, I just want enough to feel comfortable. Right now my plan calls for me to sell 1% more of my stocks if the s&P goes up 1 more percent. YMMV

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Re: A simple moving average timing model using stocks and treasuries

Post by dcabler » Thu Oct 04, 2018 9:24 am

CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
Seems you've discovered Mabene Faber's method: https://papers.ssrn.com/sol3/papers.cfm ... _id=962461

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Re: A simple moving average timing model using stocks and treasuries

Post by dcabler » Thu Oct 04, 2018 9:36 am

CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
As others have pointed out, this is old ground. There is Mabene Faber's method, which is basically what you are doing. As I recall it was a paper that was downloaded quite often during and after the financial crisis. There is also a similar method outlined by Jim Otar (Hurricane Chart) using the crossover of 12 month MA and 5 month MA in order to reduce whipsaws that can happen when a market moves sideways.

I spent literally months playing with all of this a few years ago but never acted on it with my portfolio. Historically, it can certainly help reduce drawdowns, but typically doesn't always do much for upsides. And of course if any part of this is in a taxable portfolio, there are tax issues every time you move from one bucket to another. There are other things that can be added (See article from Philosophical Economics using moving averages of the unemployment rate, for example). Because I'd rather not spend all of my time obsessing over my portfolio, I ended up walking away from it. I still track these things even today just for fun, but I don't act on them..

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Re: A simple moving average timing model using stocks and treasuries

Post by CULater » Thu Oct 04, 2018 10:21 am

No, it's not Faber's method. He uses several asset classes and moves in and out of cash on each one based on the MA for each individually. My method simply moves a portion of the stock allocation to intermediate treasuries (not cash) based on the MA for stocks. If your base allocation is 50/50 you would hold that AA except when stocks dropped below their MA, when you would hold 100% treasuries. You would move 50% back into stocks when stocks moved back above the MA.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: A simple moving average timing model using stocks and treasuries

Post by CULater » Thu Oct 04, 2018 10:23 am

In reality, this "model" is simply a description of history. It happens that 2008/11 has a remainder of 6. This is really just a way of saying you would have done much better than the stock market if you'd been out of it in 2008.
Yep, that's sort of the idea behind using the MA isn't it? It pays off when there is a large drawdown in stocks because it allows you to avoid some of it.
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Re: A simple moving average timing model using stocks and treasuries

Post by rkhusky » Thu Oct 04, 2018 10:44 am

CULater wrote:
Thu Oct 04, 2018 10:23 am
In reality, this "model" is simply a description of history. It happens that 2008/11 has a remainder of 6. This is really just a way of saying you would have done much better than the stock market if you'd been out of it in 2008.
Yep, that's sort of the idea behind using the MA isn't it? It pays off when there is a large drawdown in stocks because it allows you to avoid some of it.
And how often would this method give false buy and sell signals versus true ones?

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Re: A simple moving average timing model using stocks and treasuries

Post by nisiprius » Thu Oct 04, 2018 11:06 am

rkhusky wrote:
Thu Oct 04, 2018 10:44 am
CULater wrote:
Thu Oct 04, 2018 10:23 am
In reality, this "model" is simply a description of history. It happens that 2008/11 has a remainder of 6. This is really just a way of saying you would have done much better than the stock market if you'd been out of it in 2008.
Yep, that's sort of the idea behind using the MA isn't it? It pays off when there is a large drawdown in stocks because it allows you to avoid some of it.
And how often would this method give false buy and sell signals versus true ones?
Perfectly, if you need adding new rules to it until it only fires at the right times... during your backtesting period you are looking at. Basically every time it fires at the wrong time, you experiment adding other rules until you can stop it from firing at that time while continuing to fire at the "right times."

I noticed this with the "Hindenburg omen" in 2010 when it was getting a lot of press. I was trying to find the actual definition of the "Hindenburg omen" and it turned out I couldn't really--it kept being "revised" and "improved." It also turned out that some were saying that the Hindenburg omen is signaling market psychology and should be ignored if you know that it isn't reflecting market psychology. I've read similar comments about market timing schemes; you shouldn't follow the signals slavishly, you should know which to follow and which to ignore.
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Re: A simple moving average timing model using stocks and treasuries

Post by nisiprius » Thu Oct 04, 2018 11:09 am

rkhusky wrote:
Thu Oct 04, 2018 10:44 am
CULater wrote:
Thu Oct 04, 2018 10:23 am
In reality, this "model" is simply a description of history. It happens that 2008/11 has a remainder of 6. This is really just a way of saying you would have done much better than the stock market if you'd been out of it in 2008.
Yep, that's sort of the idea behind using the MA isn't it? It pays off when there is a large drawdown in stocks because it allows you to avoid some of it.
And how often would this method give false buy and sell signals versus true ones?
At one point, after Kennedy's assassination, there was a pattern--later called the "curse of Tippecanoe"--that seemed quite creepy. Starting in 1840, every President elected in a year ending in 0 died in office. Seven signals, seven deaths in office. Reagan finally broke the pattern. But you can have very convincing relationships that are purely chance.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: A simple moving average timing model using stocks and treasuries

Post by willthrill81 » Thu Oct 04, 2018 11:14 am

I'm not sure how Meb Faber entered the discussion. The 200 day moving average, which is roughly analogous to the 10 month moving average, was in use a long time before Meb was even born.
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Re: A simple moving average timing model using stocks and treasuries

Post by CULater » Thu Oct 04, 2018 11:16 am

nisiprius wrote:
Thu Oct 04, 2018 7:32 am
RonSwanson1776 wrote:
Wed Oct 03, 2018 7:42 pm
...Check out Meb Faber. He's produced a lot of material on the subject: https://papers.ssrn.com/sol3/papers.cfm ... _id=962461
He's also produced a real-world example of how well it actually worked, when he tried doing it in public, in real life, using real money, under his personal management. GTAA is both the name of his ETF and the initialism for his "Global Tactical Asset Allocation" strategy. The orange line is GTAA. The blue line isn't just stocks, it's a 40/60 balanced fund, Vanguard Conservative Growth.

Image

The ETF no longer exists so it's hard to find updated charts, and unfortunately I posted some to a defunct free image hosting service (and didn't save the originals), but the history after Faber left the fund was generally similar to what had gone before. The ETF was terminated in about 2017.

Some have said that GMOM, the ETF he launched after quitting GTAA, represents his latest and greatest incarnation of the strategy. I can't speak to that because I haven't followed it. But, for the record, GMOM still hasn't beaten VSCGX, Vanguard Conservative Growth, and obviously has had noticeably more volatility. Note that VSCGX has had a fixed allocation for some time, and that the only thing it has in it to reduce volatility is the presence of 60% in bond index funds... in an era when bonds have not been doing particularly well. And it has international exposure. In fact at the moment it has more international exposure than GMOM (15% cash, 73% US stocks, only 6% international stock, only 1% bonds, and 5% "other," says Morningstar.)

Source
Image
So, a fairer comparison would be between VSCGX and my timing strategy using VTI (U.S. stocks) and IEI (intermediate treasuries). Faber's strategy employs international as well as commodity stocks which haven't done well over this period. This has not been a particularly favorable period for MA market timing because of being a period of a sustained bull market in stocks. From 2011 to present here are the results for $10,000 invested:

________Ending Value____CAGR_____SD______Max Drawdown______Sharpe

VSCGX......$15,443.........5.77%.......4.71%..........-7.42%........1.15
Timing......$16,954.........7.05%.......4.29%..........-3.57%........1.54
50/50.......$17,937.........7.83%.......5.25%..........-6.57%........1.41

You would have done better simply holding a 50/50 allocation rebalanced annually, but that's because it has been a bull market period. Still, timing wasn't all that bad anyway and it should do better if there's a significant downturn in stocks coming up.
Last edited by CULater on Thu Oct 04, 2018 11:32 am, edited 2 times in total.
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Re: A simple moving average timing model using stocks and treasuries

Post by willthrill81 » Thu Oct 04, 2018 11:20 am

CULater wrote:
Thu Oct 04, 2018 11:16 am
nisiprius wrote:
Thu Oct 04, 2018 7:32 am
RonSwanson1776 wrote:
Wed Oct 03, 2018 7:42 pm
...Check out Meb Faber. He's produced a lot of material on the subject: https://papers.ssrn.com/sol3/papers.cfm ... _id=962461
He's also produced a real-world example of how well it actually worked, when he tried doing it in public, in real life, using real money, under his personal management. GTAA is both the name of his ETF and the initialism for his "Global Tactical Asset Allocation" strategy. The orange line is GTAA. The blue line isn't just stocks, it's a 40/60 balanced fund, Vanguard Conservative Growth.

Image

The ETF no longer exists so it's hard to find updated charts, and unfortunately I posted some to a defunct free image hosting service (and didn't save the originals), but the history after Faber left the fund was generally similar to what had gone before. The ETF was terminated in about 2017.

Some have said that GMOM, the ETF he launched after quitting GTAA, represents his latest and greatest incarnation of the strategy. I can't speak to that because I haven't followed it. But, for the record, GMOM still hasn't beaten VSCGX, Vanguard Conservative Growth, and obviously has had noticeably more volatility. Note that VSCGX has had a fixed allocation for some time, and that the only thing it has in it to reduce volatility is the presence of 60% in bond index funds... in an era when bonds have not been doing particularly well. And it has international exposure. In fact at the moment it has more international exposure than GMOM (15% cash, 73% US stocks, only 6% international stock, only 1% bonds, and 5% "other," says Morningstar.)

Source
Image
So, a fairer comparison would be between VSCGX and my timing strategy using VTI (U.S. stocks) and IEI (intermediate treasuries). Faber's strategy employs international as well as commodity stocks which haven't done well over this period. This has not been a particularly favorable period for MA market timing because of being a period of a sustained bull market in stocks. From 2011 to present here are the results for $10,000 invested:

________Ending Value____CAGR_____SD______Max Drawdown______Sharpe

VSCGX......$15,443.........5.77.......4.71..........-7.42........1.15
Timing......$16,954.........7.05.......4.29..........-3.57........1.54
Yes, examining any strategy, whether it is buy-and-hold or timing, over a short-term period is folly.

Those who claim that all of this is backtested voodoo should dig into the academic literature regarding it. Larry Swedroe has, and he has come around on momentum factor.
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Re: A simple moving average timing model using stocks and treasuries

Post by willthrill81 » Thu Oct 04, 2018 12:14 pm

Looking at (2) specifically, why do the most vocal practitioners of market timing tend to perform poorly as investors? The answer is not that they are poor market timers per se. Rather, the answer is that they tend to always be underinvested. By nature, they’re usually more risk-averse to begin with, which is what sends them down the path of identifying problems in the market and stepping aside. Once they do step aside, they find it difficult to get back in, especially when the market has gone substantially against them. It’s painful to sell something and then buy it back at a higher price, locking in a loss. It’s even more difficult to admit that the loss was the result of one’s being wrong. And so instead of doing that, the practitioners entrench. They come up with reasons to stay on the course they’re on–a course that ends up producing a highly unattractive investment outcome.

To return to our space-time analogy, if an investor were to allocate 5% of the space of her portfolio to equities, and 95% to cash, her long-term performance would end up being awful. The reason would be clear–she isn’t taking risk, and if you don’t take risk, you don’t make money. But notice that we wouldn’t use her underperformance to discredit the concept of “diversification” itself, the idea that dividing the space of a portfolio between different asset classes might improve the quality of returns. We wouldn’t say that people that allocate 60/40 or 80/20 are doing things wrong. They’re fine. The problem is not in the concept of what they’re doing, but in her specific implementation of it.

Well, the same point extends to market timing. If a vocal practitioner of market timing ends up spending 5% of his time in equities, and 95% in cash, because he got out of the market and never managed to get back in, we shouldn’t use his predictably awful performance to discredit the concept of “market timing” itself, the idea that dividing a portfolio’s time between different asset classes might improve returns. We shouldn’t conclude that investors that run market timing strategies that stay invested most of the time are doing things wrong. The problem is not in the concept of what they’re doing, but in his specific implementation of it.
emphasis added
http://www.philosophicaleconomics.com/2 ... ngaverage/
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Re: A simple moving average timing model using stocks and treasuries

Post by CULater » Thu Oct 04, 2018 12:17 pm

Another model I looked at was to move between Wellington and Wellesley based on the 10-month MA for stocks (S&P500 index). When the price of stocks is above the MA you are 100% in Wellington (about 2/3 stocks) and when below you are 100% in Wellesley (about 1/3 stocks). This was compared to being 100% in Wellington following buy-and-hold. Returns since 1985 are almost identical but you would have had about half the drawdown in 2008 following this strategy (9.8% vs. 22.3%) and the max drawdown would have been 19.8% vs. 32.5%. The Sharpe for the timing portfolio was 0.84 vs. 0.74 for Wellington.
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Re: A simple moving average timing model using stocks and treasuries

Post by dcabler » Thu Oct 04, 2018 12:21 pm

CULater wrote:
Thu Oct 04, 2018 10:21 am
No, it's not Faber's method. He uses several asset classes and moves in and out of cash on each one based on the MA for each individually. My method simply moves a portion of the stock allocation to intermediate treasuries (not cash) based on the MA for stocks. If your base allocation is 50/50 you would hold that AA except when stocks dropped below their MA, when you would hold 100% treasuries. You would move 50% back into stocks when stocks moved back above the MA.
Sure, but it can be simplified to only 2 asset classes as he referred to when he referred to the Siegel paper from 2002. Point is, all, including your proposal are built around some sort of moving average and they share certain characteristics.

Several issues I've seen in my own backtesting whether one is moving all in or all out based on a MA trigger or between any two arbitrary AA's:

- Treasuries aren't guaranteed to be anti-correlated to stocks. That happened during the financial crisis, but it hasn't always happened. That said, it does appear that how far downward treasuries can move is more limited than stock.
- Detecting a trend using any sort of moving average means that one must wait long enough to have confidence that a trend is occurring. There is nothing special about 200days (or 10 months), nor the 12 month/5 month that Otar advocates. It's just that it seems to have often worked historically. Because you have to wait to establish the trend, if a true trend does arise, you will be by definition late to the trend. If you make the moving average shorter, real trends are detected earlier, but you get more false triggers. If you make the moving average longer, then more false triggers are eliminated, but the lag to detect a trend is longer meaning that the positive effects you are trying to achieve are reduced.
- If instead of monitoring the crossing point of the moving average vs stocks and you monitor the percentage difference between the two, the crossing occurs at 0%. This is just an equivalent way of looking at things. Now, if you graph the data, you can see that there are times when it crosses by just a fraction to a few percent then returns. If 0% is your trigger point, then this is a whipsaw. You took action and immediately undid it. And because of the delay, most likely you didn't do as well as if you had just stayed put and not changed your AA based on the trigger. You can help with this by adding hysteresis. That is, require it to drop by a few percent below zero before you go to treasuries, then require it to rise by a few percent above zero before you go back to your AA. Problem is, how do you choose this? Again, there is no law of the universe at work here and there is nothing to keep the % from just missing your trigger and staying there for a while before crossing (or recovering). This is the point where I gave up. In the historic record I was able to find the hysteresis that prevented any whipsaws from happening during history. And absolutely there is no way to guarantee that those numbers would hold up going forward. By the way, I did this using Otar's 12/5 MA instead of the Faber/Siegel 10MA just because the data is a lot less noisy, but the delays are inherently longer...

I think the last thing I tried and gave up on was using this sort of thing as a trigger to rebalance. That is, if the stock portion is on a roll, just let it go even if it moves my AA far out of whack to be stock heavy and use a MA to tell me when to rebalance back down to my desired AA (and vice versa). Same sorts of issues and highly sensitive to the starting point of the backtest...

Hope this helps.

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Re: A simple moving average timing model using stocks and treasuries

Post by wolf359 » Thu Oct 04, 2018 12:47 pm

CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
Are you mixing two methods?

The point of an asset allocation is that the stocks and bonds aren't correlated. If the market drops sufficiently, the bonds don't, and it takes a larger market drop to really feel the pain.

The point of a timing system that you describe is to switch out of the market when the market drops sufficiently.

What you're doing is taking a stock/bond mix to temper the market drop, then switching out of the market anyways. It's like you're limiting your upside and downside at the same time.

Why not just go all-in or not at all? Why not use the timing system to buy stocks, and when it says sell, buy treasuries (or sit in cash)?

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Re: A simple moving average timing model using stocks and treasuries

Post by willthrill81 » Thu Oct 04, 2018 1:06 pm

wolf359 wrote:
Thu Oct 04, 2018 12:47 pm
CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
Are you mixing two methods?

The point of an asset allocation is that the stocks and bonds aren't correlated. If the market drops sufficiently, the bonds don't, and it takes a larger market drop to really feel the pain.

The point of a timing system that you describe is to switch out of the market when the market drops sufficiently.

What you're doing is taking a stock/bond mix to temper the market drop, then switching out of the market anyways. It's like you're limiting your upside and downside at the same time.

Why not just go all-in or not at all? Why not use the timing system to buy stocks, and when it says sell, buy treasuries (or sit in cash)?
It depends on the investor's preferences. An all-or-none strategy is what I practice in my trend following, but this can lead to remorse after the fact. Tempering one's movements with incremental changes in AA can be an easier pill for some to swallow.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: A simple moving average timing model using stocks and treasuries

Post by wolf359 » Thu Oct 04, 2018 1:38 pm

willthrill81 wrote:
Thu Oct 04, 2018 1:06 pm
wolf359 wrote:
Thu Oct 04, 2018 12:47 pm
CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
Are you mixing two methods?

The point of an asset allocation is that the stocks and bonds aren't correlated. If the market drops sufficiently, the bonds don't, and it takes a larger market drop to really feel the pain.

The point of a timing system that you describe is to switch out of the market when the market drops sufficiently.

What you're doing is taking a stock/bond mix to temper the market drop, then switching out of the market anyways. It's like you're limiting your upside and downside at the same time.

Why not just go all-in or not at all? Why not use the timing system to buy stocks, and when it says sell, buy treasuries (or sit in cash)?
It depends on the investor's preferences. An all-or-none strategy is what I practice in my trend following, but this can lead to remorse after the fact. Tempering one's movements with incremental changes in AA can be an easier pill for some to swallow.
A variant I've seen is William Bernstein's tactical asset allocation, where he proposed adjusting between more and less aggressive asset allocations based on the market.

He doesn't advocate that anymore. I think he found timing didn't work that well.

OP was proposing partial-or-none. Why not just pick a less volatile asset for the "risk on" signal? Otherwise when you've got an "risk on" signal, you're diluting your returns with bonds. When it says "risk off", you're still turning it all the way off.

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Re: A simple moving average timing model using stocks and treasuries

Post by HomerJ » Thu Oct 04, 2018 1:47 pm

CULater wrote:
Wed Oct 03, 2018 11:54 am
The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope.
The long-term 10% historical return of the stock market INCLUDES the crashes.

Read that again.

You didn't have to avoid the crashes and the (temporary) losses to get a very good long-term return and become wealthy.

Note the phrase "long-term" though. If you need the money in 0-10 years, you probably shouldn't have it in the market because short-term returns can indeed be losses.

Being 50/50 in stocks/bonds (or CDs) seems like a good long-term plan. You don't have to time anything correctly, and you have enough coming in from dividends, and enough in bonds (or CDs) that you can weather a crash over the short-term without selling stocks, and still get the long-term returns from stocks.
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Re: A simple moving average timing model using stocks and treasuries

Post by willthrill81 » Thu Oct 04, 2018 1:52 pm

HomerJ wrote:
Thu Oct 04, 2018 1:47 pm
CULater wrote:
Wed Oct 03, 2018 11:54 am
The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope.
The long-term 10% historical return of the stock market INCLUDES the crashes.

Read that again.

You didn't have to avoid the crashes and the losses to get a very good long-term return and become wealthy.

Note the phrase "long-term" though. If you need the money in 0-10 years, you probably shouldn't have it in the market because short-term returns can indeed be losses.

Being 50/50 in stocks/bonds (or CDs) seems like a good long-term plan. You don't have to time anything correctly, and you have enough coming in from dividends, and enough in bonds (or CDs) that you can weather a crash over the short-term without selling stocks, and still get the long-term returns from stocks.
The problem with buy-and-hold is the deep drawdowns. This is hard for many to stomach. Even if their stock holding are 'just' 50% of their portfolio, seeing that get cut in half is something that some investors want to avoid.

The problem with market timing is looking different from the market. Most market timing systems underperform the market during a bull market. While it hasn't been straight up for the last nine years as some insinuate, buy-and-hold has beaten pretty much every timing strategy I've seen. It can be hard to stick with a 'losing' strategy for a decade. This problem is also shared with factor investing.
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Re: A simple moving average timing model using stocks and treasuries

Post by HomerJ » Thu Oct 04, 2018 2:53 pm

willthrill81 wrote:
Thu Oct 04, 2018 1:52 pm
The problem with buy-and-hold is the deep drawdowns. This is hard for many to stomach. Even if their stock holding are 'just' 50% of their portfolio, seeing that get cut in half is something that some investors want to avoid.
This is correct, and this board (usually) helps people stomach those temporary losses. We also preach having an AA that lets you sleep at night, in case that 50% drop starts tomorrow. If temporary 25% losses are too much to stomach, then maybe one should be 30/70 stocks/bonds.
The problem with market timing is looking different from the market. Most market timing systems underperform the market during a bull market. While it hasn't been straight up for the last nine years as some insinuate, buy-and-hold has beaten pretty much every timing strategy I've seen. It can be hard to stick with a 'losing' strategy for a decade. This problem is also shared with factor investing.
This is also correct.

I'm not sure which is harder to stomach. I think the market timing approach is harder to stick to.

The buy and hold person has a bad couple of years every decade or so, but most of the time, feels pretty good.

The market-timing person is validated a couple of years every decade or so, but most of the time, wonders if they made a bad choice as they trail the market. FOMO (Fear of Missing Out) is another powerful human emotion.

It seems to me like the market-timing person has a harder time of it. Because they are worrying they made the wrong choice more of the time.

AND there a ton of different market timing strategies... So they have to worry if they are using a good one. Ton of noise out there toting "the best" or "better" market-timing strategies.

And each crash can be different for the market-timer. The next crash will be different from the last one, your particular strategy may not hold up, and a new "better" market-timing strategy will be introduced that would have avoided that most recent crash.

While each crash is the same for the buy and hold guy. You come here in a panic and hopefully get help "staying the course". :)

But, yes, each has its positives and negatives.
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Re: A simple moving average timing model using stocks and treasuries

Post by Theoretical » Thu Oct 04, 2018 3:42 pm

HomerJ wrote:
Thu Oct 04, 2018 2:53 pm
willthrill81 wrote:
Thu Oct 04, 2018 1:52 pm
The problem with buy-and-hold is the deep drawdowns. This is hard for many to stomach. Even if their stock holding are 'just' 50% of their portfolio, seeing that get cut in half is something that some investors want to avoid.
This is correct, and this board (usually) helps people stomach those temporary losses. We also preach having an AA that lets you sleep at night, in case that 50% drop starts tomorrow. If temporary 25% losses are too much to stomach, then maybe one should be 30/70 stocks/bonds.
The problem with market timing is looking different from the market. Most market timing systems underperform the market during a bull market. While it hasn't been straight up for the last nine years as some insinuate, buy-and-hold has beaten pretty much every timing strategy I've seen. It can be hard to stick with a 'losing' strategy for a decade. This problem is also shared with factor investing.
This is also correct.

I'm not sure which is harder to stomach. I think the market timing approach is harder to stick to.

The buy and hold person has a bad couple of years every decade or so, but most of the time, feels pretty good.

The market-timing person is validated a couple of years every decade or so, but most of the time, wonders if they made a bad choice as they trail the market. FOMO (Fear of Missing Out) is another powerful human emotion.

It seems to me like the market-timing person has a harder time of it. Because they are worrying they made the wrong choice more of the time.

AND there a ton of different market timing strategies... So they have to worry if they are using a good one. Ton of noise out there toting "the best" or "better" market-timing strategies.

And each crash can be different for the market-timer. The next crash will be different from the last one, your particular strategy may not hold up, and a new "better" market-timing strategy will be introduced that would have avoided that most recent crash.

While each crash is the same for the buy and hold guy. You come here in a panic and hopefully get help "staying the course". :)

But, yes, each has its positives and negatives.
I think another factor of the timing systems, which is one of the things in their favor is that you HAVE to do the trade that looks awful or stupid or is counter to everything you feel in your gut. In an odd way, trend followers and deep value investors have to have similar discipline and differ chiefly on their time horizon (trend is typically less than a year and deep value could be years and years away). Both can be both gut wrenching and lonely places in the wind.

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Re: A simple moving average timing model using stocks and treasuries

Post by CULater » Thu Oct 04, 2018 4:22 pm

The more you think about it, the more you come to think that behavioral risk is really the elephant in the room when it comes to investing. Buy-and-hold carries the behavioral risk of not being able to stick with one's AA, especially in hard down markets. The "antidote" is to have an AA that you can stomach when the foul winds start blowing. It's a moving target, because one's "risk tolerance" is not static. It seems to be much greater when markets are doing well, but not so much when markets are tanking. Either you have a conservative AA that you can stick with in the hard times but will leave you feeling left out during the good times, or vice versa.

My theory is to do something like setting a range on your stock allocation, rather than a static percentage. Perhaps the top of the range is 60% and the bottom is 30%. This might represent the peak and valley of my "risk tolerance" which ebbs and flows anyway. Let the MA timing signal mechanically move you between your :happy risk tolerance AA and your :( risk tolerance AA. You don't have to fight your natural instincts quite as much to bet more during a winning streak and bet less during a losing streak. You know, B&H and Rebalance is really a contrarian investment philosophy and contrarians always have to worry if the market knows more than they do.
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Re: A simple moving average timing model using stocks and treasuries

Post by HomerJ » Thu Oct 04, 2018 11:59 pm

CULater wrote:
Thu Oct 04, 2018 4:22 pm
The more you think about it, the more you come to think that behavioral risk is really the elephant in the room when it comes to investing. Buy-and-hold carries the behavioral risk of not being able to stick with one's AA, especially in hard down markets. The "antidote" is to have an AA that you can stomach when the foul winds start blowing. It's a moving target, because one's "risk tolerance" is not static. It seems to be much greater when markets are doing well, but not so much when markets are tanking. Either you have a conservative AA that you can stick with in the hard times but will leave you feeling left out during the good times, or vice versa.
50/50! That's what I do... That way you're never wrong! :)

Stocks are going up, you've got a good amount making money.

Stocks are going down, you've got a good amount that is safe.
My theory is to do something like setting a range on your stock allocation, rather than a static percentage. Perhaps the top of the range is 60% and the bottom is 30%. This might represent the peak and valley of my "risk tolerance" which ebbs and flows anyway. Let the MA timing signal mechanically move you between your :happy risk tolerance AA and your :( risk tolerance AA. You don't have to fight your natural instincts quite as much to bet more during a winning streak and bet less during a losing streak. You know, B&H and Rebalance is really a contrarian investment philosophy and contrarians always have to worry if the market knows more than they do.
That's a much better plan than going 100% in and 100% out.
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Re: A simple moving average timing model using stocks and treasuries

Post by watchnerd » Fri Oct 05, 2018 1:12 am

CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
I thought you were marketing timing based on CAPE.

Why this new scheme?
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Re: A simple moving average timing model using stocks and treasuries

Post by CraigTester » Fri Oct 05, 2018 12:00 pm

CULater wrote:
Wed Oct 03, 2018 11:54 am
I've been fiddling around on Portfolio Visualizer with a simple timing model using two assets: U.S. stocks and U.S. intermediate treasuries. One model switches between 100% stocks and 100% IT using the 10 - month moving average for stocks. The other switches between 50% stocks/ 50% treasuries and 100% treasuries using the 10 - month MA for stocks. In both cases, the returns proved to be greater and the drawdowns in 2000-02 and 2007-08 much lower. The model seems like it might be a good way for investors who are worried about possible large losses in stocks due to extreme current valuations to minimize those losses, as opposed to buy-and-hope. One could simply maintain the preferred AA, such as 60/40, and move out of stocks completely into treasuries when stocks break lower than their 10-month MA, and then back to the preferred AA when stocks break back above their 10-month MA. Criticisms? Thoughts?
Psst, I'll let you in on a little secret.

If you ever stumble on an algorithm that actually works, the last thing you will ever do is post it on the internet. If you have the ability to develop the program in the first place, you'll also have the ability to not need external validation to confirm that it works.

However, you might still enjoy coming on to forums like this to understand the rationalizations people come up with to defend doing things like owning the SP500 when we are at three-sigma valuation levels; or owning intermediate term bond funds during periods when the Fed has dropped rates to zero.

If the real goal behind your question is to gain "existence proof", I can confirm it is absolutely possible to time the market successfully, despite what "everyone" will tell you. I won't tell you how, but just knowing its possible, should help you in your efforts.

As for the trade-offs (versus buy-n-wait), beyond superior returns, it boils down to how you prefer to spend your "waiting time".

As a buy-n-holder, you'll spend much of your time waiting to regain your previous high water mark. Sometimes this can be quite unpleasant, particularly if you can't resist peeking at the news headlines during an extended downturn. Its also important to understand, that despite the amnesia that bull markets tend to create, sometimes these down periods can last for more than a decade - though you may get teased along the way with temporary periods of getting your head above your high water line before submerging again.

In contrast as a market-timer, you'll spend your time waiting at your personal high-water mark, while the market continues to go up without you. Depending on your algorithm, these wait periods typically span 2 or 3 years, but on occasion can last longer. You do need to maintain somewhat of a contrarian outlook during these FOMO periods. But if you've done your homework, you'll have plenty of understanding that markets simply do crazy things in the short term - but always return to sanity in the long term.

Good luck with your fiddling!

CraigTester

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"The Track Record of the 200 Day Moving Average"

Post by Taylor Larimore » Sat Oct 27, 2018 11:44 am

Bogleheads:

Before using the 200-Day Moving Average to market-time your stock allocation -- Read this:

How To Know When It's Time To Leave The Party

Best wishes.
Taylor
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Re: A simple moving average timing model using stocks and treasuries

Post by 2015 » Sat Oct 27, 2018 11:29 pm

Charlie Munger has stated where there is complexity there is fraud, opaqueness, and mistakes.

There is only one time when I attempt to make a forecast or prediction, and that's when it comes to human nature and behavioral bias. My prediction is sooner or later I see a cliff in your future.

Over the course of investing history, so so many have gone over that cliff, so many have had to learn the hard way (read Devil Take The Hindmost and others like it). Why should you be one of them?

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Re: A simple moving average timing model using stocks and treasuries

Post by jbranx » Sat Oct 27, 2018 11:56 pm

If you want to check the real-world history of allocating between the S&P 500 and long treasuries in this case, look at the history of the Vanguard Asset Allocation Fund. It was started and run for many years by Bill Fouse, the founder of the very first index fund at the old Wells Fargo. I don't remember the exact secret sauce Fouse and his Mellon Capital group used, but it fairly regularly made small adjustments between the two asset classes. Vanguard closed the fund and folded it into some other fund because over the long history it could not repeat the first few years of good performance. I am sure given Fouse's expertise that he had a very sophisticated model that backtested superbly. Pretty astute history behind him; in addition to being the first out the gate with an index fund, initially tracking the NYSE composite, he found how to make indexing work with the 500. He also wrote a very perceptive paper way early in the game called "The Small Cap Hoax." Just making the point that many have tried, some damned smart and some not quite as much, but all have ended up in the dustbin of magic elixirs of market fantasies that failed.

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Re: A simple moving average timing model using stocks and treasuries

Post by hdas » Sun Oct 28, 2018 8:23 am

Perhaps relevant:
Paired-Switching for Tactical Portfolio Allocation

Abstract
Paired-switching refers to investing in one of a pair of negatively correlated equities/ETFs/Funds and periodic switching of the position on the basis of either the relative performance of the two equities/ETFs/Funds over a period immediately prior to the switching or some other criterion. It is based upon the idea that if the returns of two equities are negatively correlated, the overlapping of the periods during which the equities individually yield returns greater than their mean values will be infrequent. Consequently, if the criterion for switching is even minimally accurate in its ability to identify the boundaries of such periods, there is a possibility of improving the performance of the portfolio consisting of the two equities over the portfolio wherein the two equities are statically weighted on the basis of traditional methods such as, for example, variance minimization. In this paper we present some results that indicate that some very simple criteria for paired-switching can lead to lower volatility without any significant penalty in terms of lower returns.
Link: https://papers.ssrn.com/sol3/papers.cfm ... id=1917044
Stay the course and buy some more.

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